Risk Management - Goldman Sachs 2020 Investor Day

Panel Composition & Tenure:

• The risk and compliance panel includes four executives with significant firm history: Brian Lee (CRO, 25+ years), Shira Fredman (Chief Accounting Officer, 17 years), and Sarah Smith (Head of Compliance, 3 years), whose collective experience covers every set of financial statements filed as a public company.
• Karen Seymour (General Counsel) joined two years ago, bringing a fresh perspective from private practice and government service.
• The average tenure of the accounting and risk trio (Lee, Smith, Fredman) is 22 years, providing deep historical context of the firm's culture and economic cycles.

Risk Management Framework:

• Risk is defined not merely as governance but as a scarce resource consciously deployed to meet customer needs, integrated into strategic initiatives through a "disciplined risk-reward" approach.
• The firm maintains an empowered, independent risk function reporting directly to the CEO and the Board, supported by a deep bench of experts across market, credit, liquidity, operational, and cyber risk.
• Risk appetite is managed across a continuum:
  • Business as Usual (BAU): Robust shocks applied to current risks, such as doubling credit spreads in stress tests.
  • Adverse Scenarios: Comprehensive economic scenarios reflecting 5-10 year recessions (e.g., Brexit, trade wars, oil shocks).
  • Severely Adverse Scenarios: Intense prudential oversight via CCAR, serving as the intersection where risk and capital meet.

Capital Strategy & Targets:

• The firm has announced a Common Equity Tier 1 (CET1) target range of 13% to 13.5%, balancing safety, soundness, and capital deployment for client needs.
• Capital components driving this target include a 4.5% minimum, a 3% G-SIB surcharge (increasing from 2.5%), and a 5% Stress Capital Buffer (SCB) target.
• A management buffer of 50 to 100 basis points above regulatory minimums is planned to tolerate risk-weighted asset volatility and one-time losses.
• Strategic shifts in the alternatives business, specifically moving private equity and growth equity off-balance sheet and increasing credit exposure, aim to mitigate capital consumption during stress tests.

Post-1MDB & Reputational Risk Enhancements:

• The firm acknowledges ongoing investigations regarding 1MDB but emphasizes that the relevant transactions occurred more than seven years ago, coinciding with a matured control framework.
• Transaction review processes now include early vetting by regional legal and compliance groups led by managing directors, empowered to decline transactions based on size, complexity, or reputational indicia.
• A firm-wide reputational risk committee, co-chaired by the Head of Conflicts and General Counsel, reviews high-risk transactions weekly.
• Enhanced regional supervision frameworks are in place to embed compliance culture globally, overseen by a dedicated executive for international regional offices.

Employee Conduct & Surveillance:

• Conduct monitoring utilizes sophisticated internal and external surveillance tools capable of detecting patterns in employee communications and behaviors.
• Metrics regarding employee conduct are reported directly and regularly to the Board, enabling dynamic responses such as targeted training or communication of consequences.
• The "Chairman's Forum" provides specific training to senior executives on transaction review and approval, reinforcing "tone at the top" across 150 years of core values.
• The Insider Threat Team comprises former prosecutors, FBI agents, and military intelligence officials to detect and prevent employee misconduct.
• The business integrity whistleblower program is actively marketed, allowing anonymous or identified reporting across multiple channels.

Cybersecurity Program:

• Cyber risk is managed by a centralized security team and a second-line risk team, supported by Board expertise from former Naval Intelligence Director Vice Admiral Jan Tai.
• The program is bifurcated into Defense Actions (penetration testing, bug bounties, industry/government threat sharing) and Response/Recovery Actions (tabletop exercises, application/data recovery capabilities).
• Despite rigorous defenses, inherent cybersecurity risks continue to increase, necessitating continued investment.

Integration of Risk and Growth:

• Compliance and Risk teams participate in business planning from "day one" of new initiatives, with no business launch permitted without their sign-off.
• Specific examples of early integration include the Apple Card (hiring credit card specialists in Legal ahead of launch) and United Capital acquisition (compliance involvement in due diligence and integration).
• Compliance officers are embedded in business units, such as the Equities steering committee, to ensure controls are designed into new technology stacks.

Top-Risk Priorities & Outlook:

• Strategic Initiatives: The CRO prioritizes ensuring all new growth strategies adhere to risk appetite, including the willingness to slow growth if deemed prudent.
• Recession Planning: Despite a low immediate probability assessment, the firm dedicates significant resources to preparing for the next economic downturn.
• Climate Risk: Climate factors are increasingly integrated into credit underwriting, stress testing, and Board agenda items.
• Regulatory & Geopolitical Risks: Top compliance concerns include meeting global regulatory obligations, new privacy legislation, the LIBOR transition, and legal risks associated with Brexit.
• Capital Advocacy: The firm actively engages with regulators and peers to ensure cohesive rule-making, preventing overcapitalization of specific products that could impair market liquidity.

Accounting Discipline (Mark-to-Market):

• While the firm is growing its "Held for Investment" (HFI) loan portfolio, it maintains fair valuations across all assets and liabilities regardless of accounting designation.
• An independent verification group validates all asset and liability valuations to ensure the balance sheet is accurately valued at all times.
• The firm retains the flexibility to reclassify positions from HFI to "Held for Sale" to align with risk management intent if market conditions change.